There are no shortcuts to wealth creation. It’s about doing the right things at the right times, over and over again. We don’t believe in cutting corners or compromising on our values for short term gains.

You are never too young to start a nest egg, ‘there is no excuse for not saving’, ‘how much is enough to retire on? Only 6 per cent of South Africans save enough for retirement, ‘spending less is not saving’. We have heard and seen it all in newspapers, magazines and even on TV (ad nauseum).

At face value, these commonly heard statements appear to have merit. The figure below shows the indexed performance of the Dow Jones industrial average from 30 June 1916 to present−quite a bit of data there. This highlights that if you had invested one unit of capital 100 years ago and reinvested all dividends, it would be worth 1 242.72 units of capital today. Saving appears to pay off rather well.

That is 1 242 times your original money, so the argument goes that if you had decided to spend that one unit of capital 100 years ago you would forgo 1 242 units of capital today, which sounds like a no-brainer: sacrifice your current one unit of capital consumption to be able to consume 1 242 units of capital in the future.

It is not exactly squirrelling away nuts for the winter: it would appear that those nuts that you buried a few summers ago, sprouted, grew into trees, created more nuts, which fell off the trees, sprouted, grew into trees, repeated and so forth. The nuts would have multiplied to such an extent that you wouldn’t know what to do with them all.

How many nuts are you able to actually consume? Saving seems such an easy game.

The size of the stash

Many are likely thinking: I’m not going to be around in 100 years, so who cares? And secondly, the more astute reader would suggest that those are nominal returns and need to be adjusted for inflationary effects.

While the first comment is a valid objection, the argument will hold for shorter time periods as well. The second comment is akin to saying ‘but those nuts you have stashed away are much smaller than the original ones, and you need to adjust for the total mass of your stash and measure these nuts as per the original size’. The new nuts are ‘nominal’ rather than ‘real’.

Without getting into a debate about the appropriateness of weightings and content of specific inflation indices, the US Consumer Price Index (CPI) is a decent enough proxy for generalised US inflation – especially in the long term. The US CPI level increased from 10.8 at the end of June 1916 to its current 241.038, as found by Bloomberg, essentially meaning that the buying power of one unit has diluted by 22.32 times. So the new 1 242.72 nuts are only 55.68 nuts in the original size terms. Still not a bad outcome. With the money that you would have spent on that luxury car 100 years ago, you can now buy almost 56 cars! Sounds like a worthwhile exercise in frugality. Or does it?

Unfortunately, there’s the ultimate elephant in the room: investment fees or total expense ratios (TERs). Fees are charged on nominal value and South African equity general fund fees range from 0.17 per cent to 5.34 per cent per annum, states Glacier Financial Solutions, which excludes any transaction and brokerage costs. So let’s say the investor was charged 2 per cent total fee per annum, how much would your final investment be worth? Alternatively, how many nuts would you have? Unfortunately for the investor, due to those fees, the nominal 1 242.7 nuts are reduced to a nominal 171.5 nuts. In real terms, your 55.7 real nuts have reduced to 7.7 nuts.

That luxury car that you didn’t buy 100 years ago can purchase you 7.7 luxury cars today. That exercise in frugality has also bought 48 luxury cars for the investment industry.

So investment managers actually do care about savings. They want their clients to save much more and invest for a very long time. In fact, there is no excuse not to start saving early – that is a perfectly rational thing for someone from the investment management industry to suggest. Perhaps the real problem with individuals retiring with too few nuts saved is due to excessive ongoing fees rather than original invested amounts.

It may sound strange that a hedge fund manager is talking about lower fees, but the paradox is that standard hedge fund fees of ‘1 and 20’ would have resulted in less than 2 per cent fixed fees over the 100-year period shown above.

Next time you hear ‘Fees must fall’, think about it really hard about what it means before actually responding.

DISCLAIMER

Investors should take cognisance of the fact that there are risks involved in buying or selling any financial product and that past performance of a financial product is not necessarily indicative of its future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions.

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